Risk Management Essentials: Optimizing Environmental Insurance for Today’s Challenges

Dave Colonna: Hello, and welcome. While we wait for more participants to join us, on screen you will see the ERIS content disclaimer that you can take a minute to read. As always, the information contained in the webinar, and provided by the hosts or panelists and related material are not intended to constitute advice, including legal advice of any kind, or the rendering of consulting or other professional services, to read more, visit erisinfo.com/disclaimer. This webinar is being recorded and will be posted on the ERIS website in the next few days at erisinfo.com. Today’s presentation will be about an hour and  min or so in time. So just a little housekeeping here we will also have time dedicated to Q&A after the presentation. Please enter any questions that you have in the Q&A section of the platform and not in the chat. We’ll just be able to see it easier in that Q&A section. I know a lot of you also submitted questions earlier. We’ll also try and get to all of those after all of the presentations. So with that, let’s get started. I’m Dave Colonna, director of lender solutions here at ERIS and I’ll be moderating today’s Webinar: Risk Management Essentials, Optimizing Environmental Insurance for Today’s Challenges. As you may know, ERIS is an environmental risk and property data solutions company that provides information and tools necessary to assess potential environmental exposures that can impact insurance coverages and liability. We use the most advanced platforms to help environmental professionals, lenders and insurance companies review and analyze critical data and historical products. We also have ERIS direct, which is an online subscription service that allows users to gain immediate access to real time, environmental risk information and empowers decision makers to assess risks quickly. Additionally, the climate risk assessment report offers instant insights to property risks related to climate change, helping stakeholders prepare for both current and future environmental challenges, which is also essential when determining the correct insurance coverage. So on today’s webinar, we’re going to cover a wide range of important topics from legal considerations to environmental assessments and insurance coverage to specific case studies, showcasing how insurance can help mitigate risks during real estate transactions. We’re fortunate today to have a really incredible panel with us. I’d like to welcome them and give a quick introduction. You can also find more information about everybody at erisinfo.com. So 1st with us, we have Gary Walters, an environmental engineer with Bridge House Advisors. Gary has over years of experience in environmental due diligence, hazardous waste management and regulatory compliance. He’s a senior environmental business advisor at Bridge House, following his tenure as a partner at ERM and a branch chief with the U.S. Army Environmental Center. Next, we have Jared Dubrowsky, Senior VP at NFP’s environmental insurance practice. Jared has over years of experience in environmental risk management and insurance specializing in designing programs to address environmental exposures for real estate and business owners. Prior to joining NFP Jared worked in several environmental roles, including Santander. New York City’s department of city planning as well as Stantec. And finally, we have Dennis Toft, chair of Environmental law at CSG PC. Dennis is a well-respected environmental lawyer with expertise in regulatory counseling, environmental due diligence and brownfields redevelopment. He served on multiple New Jersey State environmental advisory councils and has been appointed by several governors for his environmental leadership. So without further ado, I am going to turn it over to Dennis.

Dennis M. Toft: Thank you, Dave, and good afternoon, everyone. This should be a really good program covering the gamut of environmental risk challenges and how we can ameliorate them through insurance. I often look at situations involving the environmental projects we work on almost from an algebraic standpoint. And one of the things we all should remember from algebra is that in order to solve an equation, you need to have as many equations as you have variables. So part of the challenge is understanding the variables. But as we’ll hear, environmental insurance oftentimes provides the last equation, you need to solve the environmental risk problem you’re addressing. Could we go to the next slide, please. So the 1st step in solving the environmental risk problem is to understand what the risk is and the risk can come from several different places. First,you have to understand what the transaction is. Is it just a straight, real estate deal lands, buildings, or both? Is it an asset deal versus a stock deal. Stock deals have different risks, because then you’re more interested in the corporate history of what the corporation did as opposed to a straight asset purchase which often does not have the corporate tail associated with it, although from time to time you have to be concerned that specific laws dealing with successors and interests may come into play. Then you have to understand the site, starting with understanding the history and the operational history. What may have happened there. What could the history be of conditions that require environmental attention? You have to take into account the site location. Is the site near a water body are there sensitive receptors nearby. Is the property in an environmental justice community, all of which can impact risk. And then, lastly, the initial inquiry is understanding what the future use is. Is the use going to be a continuation of the same use? Currently there? Is it going to be a redevelopment? Is the redevelopment, going to be residential, non-residential, or something else. All those factor into how you look at the risk and how you adjust it. Next slide, please. So there are several ways initially, where you try to manage the risk starting as lawyers like to do in the contract. How does the contract allocate risk among the parties? Is the seller going to keep it? Is the buyer going to assume it? And if so, what are the limitations on what might be kept or assumed. Either way you have to look at the the operations at the site, as we mentioned. What’s the compliance history? Are you at a site where material was taken off site and are there off site disposal issues which could be tracked to a company if it’s an asset deal or to a site itself. If it’s a non, I’m sorry for stock deal or the site itself. If it’s an asset deal. We talked about the neighborhood issues. Is the area an environmental justice area? Do the sensitive receptors create a potential claim for natural resource damages. Regulatory risks? What regulations apply today? How do they apply? Are there process requirements nvolving the transaction? Being an attorney in New Jersey, we deal with something called the Industrial Site Recovery Act, which is a transaction triggered environmental law which requires sites to be investigated and remediated, depending upon the use. Other States have similar laws. For instance, there’s a Connecticut Transfer Act which can come into play. So we need to understand what regulations apply, how they apply and what triggers them. You have to understand. If there’s going to be a lender involved. And what is the lender’s risk tolerance? What are the lender’s requirements? And then, as you’re getting into the scope of due diligence, you need to understand both under both Federal law, under the CERCLA or Superfund statute, the Comprehensive Environmental Response, Compensation and Liability Act. What you need to do to establish innocent purchaser protection, and that, again may vary from state to state, depending upon particularly state laws involved. New Jersey has some quirks to its state law that make it a little bit different than the Federal law, which a lot of people are surprised to learn if they’re doing deals in New Jersey. Next slide, please. So then you talk about allocating the risks starting with the contract for the transaction. Are there epresentations and warranties that a seller is making, that where the seller is representing certain things which could lead to the seller staying on a risks. Will the contract include indemnifications? Will the contract include a release of the seller? If you’re a seller and you’re transferring risk to a buyer, you need to understand how well capitalized is the buyer. Is the buyer a single purpose entity, whose only asset post deal will be the property being transferred? And is that going to be enough for you to feel protected? If the seller is assuming the cleanup, obligation that can lead to certain set asides and escrows being used to have money set aside to cover the cost from the purchase price or otherwise. If and again, it depends on who’s doing the cleanup. And then we talked about the process requirements, Isra, the Connecticut Transfer Act, etc. which may dictate what you have to do to close how you close and whether regulatory filings are needed. Pre-closing Next slide, please. So once we define the environmental risk, we then, to the extent it’s allocated, and even to the extent it may not be allocated among the parties. We look to see if insurance can fill a gap or make parties comfortable, that the risk is going to be adequately addressed and handled by somebody. There are different types of insurance. I know. I think Jared may go into more of the details of these. But just some things to think about the standard we, a lot of people think about when they say environmental insurance is pollution, legal liability or pll insurance that typically will cover 3rd party claims off. You know, off-site people who may have been exposed. it will typically cover claims related to unknown conditions. So if in the process of working on a site you discover contamination that was not previously known, you can usually get coverage under a Pll policy. Pick up the expense of that additional cleanup once it goes above a self-insured retention. There are, and used to be a big market for cost cap policies. Those come and go over time depending upon which carriers are involved. There’s also something called an excess over indemnity policy where one party may be indemnifying, and if it goes, the limits of the indemnity are exceeded. then the that policy may drop down and provide coverage. Something newer in the market which can come into effect in the environmental world is representation and warranty coverage where a carrier provides coverage backing up representations and warranties in an agreement. And we’ve seen that be used in the environmental context. Contractors, pollution liability policies. If somebody’s working on a property, a contractor is working on a property and causes a spill or causes harm. Those policies can come into play to provide protection. The whole point of a lot of these policies is to provide again a risk management tool to get investors, lenders, others, comfortable that the risk identified in the deal is being managed somewhere by somebody by an entity that presumably is solvent and not a single purpose. Entity that’s acquiring a site. It also makes it easier for buyers to understand and limit what their risks and exposures are. Next slide, please. So one of the things we like to do when we’re negotiating a deal with an environmentally challenged property is to get our environmental insurance broker involved right up front to help us do a couple of things. One is to help define contractual terms in a way where coverage can be available. Second point is to help determine the scope of due diligence needed to get an underwriter comfortable and then to understand what’s going on in the insurance market, what type of coverage is available at any particular point in time. And that changes as the risk tolerance of the carriers change like I mentioned before. For a long time cost cap policies were pretty common, they became impossible, and now some of them are coming back. Which is why it’s important to get a broker involved who understands the environmental insurance marketplace early on in the process of negotiating your contract. So, you know, and can build into the contract terms that will make it possible to ensure the deal and do your due diligence appropriately for underwriting purposes. So we like to do it right up front. And we recommend to our clients that we get our favorite environmental insurance broker involved right up front. Next slide, please? When you get into the point of actually understanding the policy there’s also a process. You know, first, getting indications. What are the terms going to be what’s insurable? What’s not? How long of a policy do you want? Typically they’re either year policies or year policies. And what term you want may depend upon the status of the site. You had a site where the cleanup is going to be done within years. It’s one thing if the cleanup is going to take longer. It might be another thing you can understand limits upfront. What self-insured retention amounts might be available. You can determine who is going to be insured under the policy. The buyer, the seller, the lender, or end users who may, you may not even know yet, but a lot of policies have flexibility built in to add insurers or insureds later. Sometimes you might want non owned disposal site coverage. And the other thing is part of the process is, you need to very carefully document what you’re telling the carrier about the site as you go through the process, we usually will make a list of disclosed document so there’s no question in the future about whether as part of the underwriting, the carrier knew everything about the property. Next slide. Policy terms are negotiated. They’re manuscript policies. Usually like in a lot of insurance policies. They’re not the easiest things to read. They’re defined coverages with exclusions. And then sometimes there are exclusions to the exclusions. So you have to take your time and understand what it is like, I said, before you need to define limits and self-insured retention and identify the named insured versus additional named insured, each of which has implications under the policy. But you do want the right to assign a policy and to add parties later on. Next slide. There are a lot of issues and concerns with the policies emerging contaminants. We all heard about PFAS. We all saw the movie sometimes, like in New Jersey, you cannot get PFAS coverage, but I think maybe in other states you can. The extent of due diligence – do you test or do you not test? That ties back into innocent purchaser protections. and it sometimes ties back into what the carrier wants, or what a lender wants. Changing regulatory landscapes. This gets back into what’s known and unknown. Sometimes you can get change in law coverage, not easy to get, but if you don’t get it, you want to understand how that risk gets allocated in the deal communications with the carriers. You need to understand what notice requirements are. My view – the more you tell the carrier as you go along, the better. Minimizes the chance that a claim will be denied. You need to document all your costs of remediation, what you’re remediating, and why, in anticipation of there being a claim. Because if you find something that’s unknown you want to make sure you show that really was unknown, and that you’ve told the carrier right away. In New Jersey there’s a big effort to recover natural resource damages. If you can get that coverage, it’s helpful, and it’s great to have. It’s hard to get in New Jersey right now. If, as part of your deal, there’s an ongoing cleanup, and you, you, as a buyer, are stepping into an ongoing cleanup that also changes the risk calculation. You have to understand what known conditions are at a site versus unknown conditions, and that’s frequently a point of negotiation. A lot of carriers will say well that you knew that contaminant was there, and it may have been there at a concentration that didn’t require cleanup. But all of a sudden you discover the mother load of mercury that you didn’t know about. And you want to be able to recover for that. So it’s important that you understand that. And there’s also, frequently we get contractual liability coverage for things assumed under a contract. And that has to be carefully worded, and exclusions associated with it have to be fully understood, and we usually will have a schedule of disclosed and listed contracts. Another term I like that’s not always there, but if you can define upfront that you have the right to choose your attorney. If there’s a claim that can be helpful as well. Next slide, please. And I think that’s it for me. I’ll be around for questions. But I am going to turn this over to Gary, who will talk about the technical aspects of insurance, due diligence, etcetera. Gary.

Gary L. Walters: Thanks Dennis, yeah. In the next segment, I’m going to be discussing the role of environmental insurance in the overall transactional process. But through the lens of the environmental consultant that’s involved in the process. So next slide, please. The first thing I want to do is provide some context as to when and under what circumstances environmental insurance becomes important in the transactional process. I’ve developed this slide to depict my view of what environmental due diligence entails. I think it consists of the six discrete and sequential steps that you see on this slide. Our focus is on environmental insurance. So I’m gonna ask you to focus on step of the slide. What happens in Step is in response to what gets identified in step . Step is where the core of the environmental diligence activities are performed. That’s where material findings, material liability issues, if such exist, that’s where they’re identified. Those need to be communicated to the client as soon as possible so that risk management measures, appropriate risk management measures can be identified, developed into a overall risk management strategy. There could be multiple material findings that are identified in the step of the environmental diligence process. So those findings could fall into one of a handful of buckets, the most common ones or relate to known or contingent property contamination. And their environmental insurance products are well suited to providing protection against the financial exposures that are associated with property contamination. But, as you see, there, there are a handful of other risk management measures that can also be considered and come into play. The finding may relate to an environmental compliance or noncompliance, finding such things as chronic noncompliance that signals the need for significant Capex in the form of air, pollution, control, equipment, or material regulatory penalties, things of that nature. If climate risk was part of the due diligence scope that was agreed upon between the client and the consultant. The due diligence activities may identify a specific asset or facility that’s very vulnerable or susceptible to climate related damages. Insurance can be a very useful means of providing protection against financial exposures associated with those damages. I am not aware of an insurance product that can mitigate exposures and risks associated with the regulatory noncompliance findings. But if such exist, I’m sure Jared in his segment will will note those, and I will revise my slide accordingly. In the next slide we’re going to drill down on this step a little bit further, and compare and contrast some of the risk management measures that are mentioned here in this slide. Before I leave this one, I wanted to emphasize another point key point that’s brought out in this slide, and this is primarily for the benefit of the consultants that are in the audience. You’ll note that in Step , when the core elements of the due diligence scope are being performed, that’s where material findings are going to be first identified. You’ll note that those findings are communicated to the client as soon as possible, so that they can be developed in Step that could be well in advance of when the consultant prepares their final report and delivers delivers that report to the client. The reason for that is that it takes time to identify appropriate risk management measures, identify the ones that are best suited to a particular transaction. There could be, as I mentioned, there could be multiple material risks, so develop identifying and developing appropriate risk management measures to address all of the material findings and material risk into a collective risk management strategy and then incorporating that risk management strategy into the ongoing negotiations with the seller. That process takes time. Could take well in excess of several weeks, maybe even longer. If the consultant waits to present its key findings in its formal report that per the contract may not be due until a week before closing and you communicate a finding where the client could be stepping into perhaps a or figure cleanup liability. I think you can predict what what the response will be. I don’t think you’re going to have a happy camper of a client. So, anyway, again, a key point, communicate key findings from the diligence process to the client as soon as possible. As soon as you’re comfortable that they are, they’re either real, or there’s a very high likelihood that they might exist. So next slide, please. So this is really a blow up of Step from the preceding slide it. It speaks to a hypothetical condition where, during the due diligence phase a significant contingent contamination situation was identified. And again, just to be clear, a contingent contamination situation means that it’s suspected but not known. There is not a smoking gun. There’s no empirical solar groundwater sampling data to confirm the presence of contamination. But through your experience and through some multiple lines of evidence, you think there’s a pretty high likelihood that this property could be significantly contaminated. So the options that are listed down the left hand side of this table are the same ones that were in the prior slide. What I’m going to do now is is compare and contrast the advantages and disadvantages of each one of those risk management measures. The first one is you could conduct a Phase II. It’s my opinion, I contend that Phase IIs are really not a risk management solution. All they do is really fill a data gap. If you perform a Phase II and you find some contamination that Phase II has done nothing to shield you from financial exposure associated with the contamination. There are other disadvantages that should be considered prior to proceeding with a Phase II. First and foremost, I’m not even sure in many instances Phase IIs are viable options, because the seller may not allow a Phase II be to be conducted in a leasehold situation. The landlord also may not allow the Phase II to be conducted. Those positions could stem from the fact that more and more states now have mandatory reporting obligations for any swollen growler sampling data. That that is not a good thing when you have a transaction between two private sector parties, and all of a sudden the regulatory agencies are involved in that process. Time and cost, I think, are self-evident. They become become more prominent, based on my experience. I think an awful lot of times, Phase IIs can be iterative. You scope a limited Phase II to confirm the presence or absence of contamination, and you find something. And then the obvious question is, well, how bad is it? And the consultants answer is, well, I can’t tell you until I get some additional data points. The next one is really the most interesting one, I think. And you conduct a Phase II and the findings from that Phase II can be an impediment to obtaining desired environmental insurance coverage specifically under a Pll policy. As Dennis mentioned this is kind of analog. If the Phase II identifies a suite of coordinated solvents and soil and groundwater you take a step back and say, Wow! I think I’d like to get some insurance coverage to protect me from the potential liabilities associated with that. It’s analogy. I think there’s a pretty darn high likelihood. And Jared can speak to this, that whatever is found in that Phase II are most likely going to be the first things that are excluded from coverage from that Pll policy. So you sort of slam the door on obtaining appropriate insurance coverage. It’s analogous to what the broker one time told me that getting coverage for contamination that is identified via Phase II is analogous to trying to get a homeowners policy once your house is already on fire. I think it’s a somewhat comedic but very appropriate analogy. The other risk management, options, or solutions that you might consider would be getting an indemnity for pre-existing conditions from the seller. Monies, funds put in escrow or concessions off the purchase price, no sellers are gonna like any of those options. And the indemnity provision is is only as good as the financial wherewithal of the indemnity or so that’s not really a terribly attractive one, even from the buy side of the transaction. Let’s focus on insurance as as a risk management measure. In terms of advantages all you need to do is look at all the disadvantages on the right side of the table. All of those things become advantages for the pollution legal liability policy, because they don’t apply. And I think another advantage is in certain cases transferable Pll policies actually can be viewed and become an asset for the insured entity. The only downsides of an insurance solution would possibly be the cost. The premium cost may not be able to get all the conditions that you want. You may get stuck with some conditions you don’t want, but both costs and conditions are negotiable. And one interesting thing about the cost is that both the the buyer and the seller want the transaction to be consummated. They want to go forward with the with the transaction. Because sellers do not like Phase IIs they don’t like the indemnities and escrows and those things. So by default, the one that they would most prefer to see is an insurance solution to the risks that have been identified. And so, because of that, there are oftentimes no, I wouldn’t say often, but I certainly have some real world experience where the seller is actually willing to pay a portion, or perhaps even all, of the premium cost, to ensure that that policy is issued. Next slide, please. So this slide assumes that the insurance solution is the one that has been selected by the client. What is the consultant’s role in securing an appropriate insurance product? As throughout the entire process, consultants work in close concert with the client and other advisors, including outside counsel, and I think, as Dennis mentioned, and couldn’t agree more, if insurance is going to be pursued as a risk management solution by all means, you need to involve an insurance broker who specializes in environmental coverages and environmental policies. The consultant’s role is to identify and characterize the issues that you’re seeking coverage for you’ve already identified the issue during the course of early early stages of the environmental due diligence process. But now you need to fully characterize those issues. The full gamut of implications and associated cost. I think, in characterizing the issue. One important point to make sure is communicated to all parties involved is what the current situation is. And with the example of a contingent contamination situation, the current situation is is pretty evident. The reason it’s a contingent contamination situation is because there’s very little regulatory scrutiny, or certainly any regulatory requirement to investigate the property. That’s why it’s a suspected contamination as opposed to perhaps a confirmed contamination situation. So, and that current situation could persist for the foreseeable future. But the exact opposite could also be true. A month after closing the regulatory framework could change. So it’s incumbent upon the consultant to identify what those possible future scenarios might look like in terms of investigative work. Remediation scenarios could probably be asked to develop a range of probable scenarios ranging from the reasonable best case to the reasonable worst case, perhaps also including a most likely case scenario. You may be asked to provide probabilities associated with each of those scenarios, and that could be done via various probabilistic modeling techniques. And you will most certainly be asked to provide the consultant’s estimate of what the cost of each of those scenarios looks like. And it’s that cost information that becomes the basis for establishing the desired limits of the insurance coverage. Final comment on this slide. This applies to the formal deliverables that are issued by the consultant in support of the transaction. I think each of these points are pretty much self evident, and they not only apply to deliverables that are produced in support of a transaction, but really any technical reports that consultants issue. The one that I’m most emphatic about is your report is identifying a significant material liability associated with a property or some other aspect of a transaction. That’s the bad news. I encourage consultants to try to couch that in your formal reports with any mitigating factors that might speak to reducing the impacts. The extent of liability associated with that material finding, and most of those mitigating factors are things of a technical nature, such as the physical setting of a site. Depth of groundwater? Are the soils impermeable? Are there sensitive receptors close to or miles away from the site? Things of that nature. I have a very lengthy list of mitigating factors that I always explore and try to consider when I’m drafting technical reports, especially in a transactional context. With that I’m done, and I’m gonna turn the podium over to Jared.

Jared Dubrowsky: Thanks, Gary. So I am Jared Dubrowsky, Senior Vice President, at NFP environmental risk practice. My focus is solely on environmental insurance. I structure these policies for our clients, work with carriers to negotiate terms work with environmental attorneys, consultants, and everything in between. We can jump to the next slide. So when you’re looking at environmental insurance, there’s multiple different types of policies that we deal with. The first and most important in my opinion, and most applicable to transaction are going to be site pollution policies. These are the most manuscriptable and moldable policies that we have out there. And the next slide. I’m sorry. The next type of policy is a contractor pollution policy. Within that we have two subsets of policies. We have one for contractors who are doing work, and a contractor is really anyone who is doing work on behalf of anyone else. So not necessarily just someone who is swinging a hammer. And then we also have contractor pollution liability policies for people who are developing sites. We have lender liability policies which offer protection to banks, and I’m going to go into each one of these in my presentation. We have standalone tank policies. We have combined form policies that offer general liability, property pollution professional coverage. We deal with those a lot. And then we have proprietary policies as well, where certain brokers will run into different circumstances, and they will place and create policies to cover those types of situations that they see on a somewhat regular basis. In addition to this, we do have cost cap policies, Dennis mentioned. I didn’t put it on here because we don’t really run into them that much, but they are starting to make a comeback. It’s not an off the shelf product. But if someone comes to us and it’s the right situation, it is a product that can be developed to cover the solution. Next slide. So when you’re looking at environmental insurance, it’s really important to look at the history of it. Right? So environmental insurance as a standalone coverage didn’t exist before 1986 or so, the reason being is that general liability policies had or did not have, any pollution exclusions at that point. But as environmental laws became more robust and came to be the insurance carrier started to exclude pollutants. So by the late 1980s, early 1990s, you started to have standalone environmental insurance. This is really important. Because when you’re looking at environmental insurance from a transactional space, a lot of these companies are legacy companies. So you do have the opportunity to go back onto some of these legacy gl policies and find coverage. And when we’re looking at some of these older companies we very often will recommend bringing in an insurance archaeologist who will go back, review the coverage, review the policies, and see if there’s anything that can go towards any pollution conditions that are on site and that could help facilitate the sale. Next slide. So contractor pollution liability policies, they are relevant to transactions, because many of the transactions that we deal with are redevelopment. So we’re not only looking at what’s in the dirt, we’re looking at the opportunity for our clients or people who are doing work on behalf of our clients to create a new pollution condition in the course of redevelopment or exacerbating existing pollution condition. So again, these policies, they’ll offer coverage for remediation, bodily injury, property damage, legal defense, transportation on disposal site, natural resource. And there’s many coverages built into that as well. We can jump to the next slide. Oh, back up one, there we go. So site pollution liability. Now, this is the world that most of the transactional people live in. Site pollution policies offer a wide array of coverage, and they are heavily manuscripted. And what I mean when I say manuscripted is, they’re not an off the shelf product. There are off the shelf environment or site pollution policies. But in a transactional space you’re not going to do that. You are going to tailor the policy to the specific deal that means working with counsel, working with the consultant, working with both the buyer and the seller to make sure that the policy wraps around all of the contracts, all of the agreements, everything that’s in place, and fills all of those gaps. So the policies themselves. They’re obviously going to offer remediation coverage. They will offer coverage for bodily injury, property, damage, legal defense, transportation, not on disposal sites, natural resource, very similar to what the contracted pollution policy will offer within that each of those coverages can be tailored. So we may have certain levels of remediation depending on known conditions. That may be on site right? But we may be looking at excluding some contaminants, but providing coverage for others, and then for others we’ll provide coverage, but at a much higher attachment point or retention. Bodily injury is something that is typically standard across the board. We can in most cases get you coverage for bodily injury, even for known contaminants depending on what the levels are. Property damage is another one. Legal defense is one of the biggest areas that we see claims in right because pollution policies can be triggered off an allegation. So all it takes is someone to call up and say, I think I may be getting sick from this issue on this site the state comes out. The policy can be triggered. Transportation. Obviously, if we’re taking waste or material from a covered location that spills over you can be pulled into that non own disposal sites, Waste from your site ends up in a waste facility that later gets pulled into some sort of Superfund issue. You can be held into that as well, and the pollution policy is what’s going to trigger and cover you for that. Natural resource, another one. Dennis touched on that as well. So any sort of issue to natural resource, certain states it’s becoming more and more prevalent. Policies will cover you for that. Within the site pollution space also important to understand the difference between pre-existing condition and new condition, Most of the time when we’re dealing with transactional, we’re looking at what are the pre-existing conditions at the site, right? What went on here what is known, what is unknown, what could potentially be here? The whole array. And pre-existing is anything that happens prior to the policy being put in place. So that is your unknown oil release or any release. Anything along those lines. New conditions would be like, I say here, illicit abandonment. Right? So very often I’ll run into someone who’s selling a site or buying a site. I don’t need environmental insurance. The Phase I is clean. That’s one of my favorite comments ever. There’s no such thing as a clean Phase I because the Phase I really is the day it was done. We don’t know what happens after that. So illicit abandonment is something that we see all the time. Right? Somebody goes out to a site, dumps something on the site. Now you as the property owner, have to clean that up. Operational exposures, such as new releases, chemicals spill during the course of manufacturing. That’s also covered by your pollution policy. But again, things like mold Legionella. Those are new conditions that could be picked up by a pollution policy as well. Next slide. Lender liability policies. I have to say these are probably one of the most underutilized policies out there, but we are starting to see great interest in these over about the last six months. The lender liability policies were designed only to protect the lender. They offer no protection to the borrower. These policies they’re triggered in the event of default and discovery of a pollution condition. So I worked at a bank. I will tell you. You know you go in. You do the Phase I. Maybe there’s a little something at the site that’s concerning. Typically it’s waived in, you know, a credit waiver memo, or by escrow. That’s not really risk transfer, right. If something happens, the bank still has to deal with it. The lender liability policies. It can be done in lieu of the Phase II, which is something we’ll discuss in a second here, and Gary touched on that as well. The benefits of the Phase II versus not to do the Phase II. But very often we’re seeing banks do a Phase II or recommended Phase II. And then we’re seeing the lenders for the borrowers say, I don’t want to do the Phase II. What are the other options? Well, this is another option. Pays the lesser of the estimated cost of remediation, or the remaining balance of the loan. Reason, the estimated cost of remediation is important is because the banks don’t want to get involved in managing the property, right? You lose certain protections under AAI innocent purchaser if your seen as managing the property. So it’s really important to understand that when you’re going into it. And what also makes these very different than your standard pollution policy is the fact that they’re underwritten off of the borrower’s financials. Because of that dual trigger event of default and discovery of pollution condition, the site qualities and properties don’t matter as much as a standard Pll policy, because the thought process here is that if the borrower is never going to go into default or not likely to go into the fault, as I should say. The likelihood that the policy is triggered is very slim. So more and more we’re seeing lenders come to us and say, Hey, I’ve got this deal. I think we need a lender policy. I’ve had environmental consultants reach out recently, and they wanted to trigger it. And we’re even seeing some borrowers come back and say, Look, I’m going in for refinance. There’s no way I’m drilling a hole in my property to find something and then potentially have to report it. What do I do? So we will offer a lender policy to them. Next slide. So to Phase II or not to Phase II. So Gary touched on that, and that’s something that is coming up more and more. I think it’s coming up more and more because of reporting requirements are changing. The PFAS in under the new ASTM Standard 1527, you know. Having to mention or reference potential presence of PFAS, people are really starting to pay attention. I am a huge advocate of doing a Phase II when it’s necessary. I do not think it’s necessary if you are just purchasing a site and going to continue the operations. If you are refinancing the property. I think you’re gonna do more harm than good, and there’s a lot of coverage that can be had even if you don’t do a Phase II. So there’s ways that we can craft a policy that will cover you for almost everything if you’re not going to change the use of the site. It’s out there. What’s important to understand with the environmental policies, and this case in particular, with the Phase IIs, it’s something that the entire insurance community has access to it. Right? You’re either going to access it directly as a retail broker like I am. I deal directly with the underwriters and with the carriers who are putting this policy out, or some of your smaller agents are going to use a wholesaler. The problem with not having direct access to these markets is that you’re not going to be able to sit down, talk with the underwriter. Talk with the attorney. You can’t bring everyone to the table. So if you are someone who needs one of these insurance policies, it’s really important to get someone who can go right to the person who’s writing it and not utilize an intermediary on some of these transactional ones. Next slide. Okay, so first case study is one that I dealt with. And this was a client of mine who purchased an industrial site. The site was remediated. They received no further action, and they wanted to put the policy in place to cover them for any potential reopener. So one of the reasons that a lot of my clients will place these site pollution policies is they can get comfortable with what’s at the site. They have a no further action letter. But the beauty about these environmental insurance policies is that if you have that no further action letter, and somewhere during the life of the policy you get a letter from the state, EPA, whoever it may be that says we need you to you know, resample this site. We have reason to believe xyz may be present on this site. You can trigger the policy, and that’s something a lot of people don’t know. But we do have a lot of people who buy the policy only for that reason. Because they’re comfortable with what’s there, but they don’t want to deal with any surprises down the road when the EPA or any other regulatory agency changes acceptable levels. So this particular site closed out. Everything was good. They got the no further action letter, purchased the policy, put it in place. Shortly after purchasing the policy they had to go in and sample. They sampled. They found contamination. They put the carrier on notice. Policy was covered in excess of the retention. So again, it’s something where let’s puts it into the clean Phase I category right? I got nothing to worry about. I got this no further action letter. It’s really important that people understand that that no further action letter, or that clean Phase I, they don’t mean all that much in the scheme of things right? No further action letters, both people on this line know they can be reopened. Cases get reopened all the time. The lay person may not understand that, so it’s important to explain it to them. You’ve got this no further action letter. But right? I know sometimes we don’t want to go there with our clients, but we have to. We have to let them know that you’re good for now, right? And as levels change right, we saw with us went from. I think it was Gary. Correct me if I’m wrong, like parts per million, maybe ten years ago, to parts per trillion overnight. Something along those lines

Gary L. Walters: Yeah four parts per trillion is the Mcl. For PFOA and PFOS.

Jared Dubrowsky: Right. And that’s now you know, years ago it was different. So things change, and they change with science. And that’s one of the reasons we place these policies.

Dennis M. Toft: Just just to add my 2 cents. I agree with Jared. Whenever you’re dealing with a property that’s got a history of contamination it behooves you to have policy in place, because not only can there be regulatory changes, but sometimes you could be in a course of constructing something and find something that was unknown previously. You know you knock down a building all of a sudden you find the oil tank that nobody knew about under there with contamination associated with it. So anytime you’re on a site like this which has a regulatory history, it’s worth looking into it, figuring out the cost, understanding the risk. And this is a perfect example of how policy protects you going forward.

Dave Colonna: Yeah, that’s great, I think, Gary, let’s let’s take a look at your case study.

Gary L. Walters: Okay, I saw a note pop up there. This is a a real world example that Bridge House worked on last last year. It involved the divestiture of a business unit within a pretty darn large public traded company. It was a a stock deal. We were on the buy side of the transaction, representing a private equity company. The company had over a hundred year history of heavy manufacturing. They manufactured gasoline, dispensing pumps. And then, in later years, all kinds of petroleum product, metering equipment, their operation. They had two large manufacturing facilities both of which were owned and one was over a million square feet, the other one was about 300,000 square feet. I coined the acronym BOO , Succinctly describe a combination of attributes that probably represent the absolute worst case in terms of likely contamination. They were big, they were old, they were owned, and they had ominous operations with respect to being chemically intensive, and lots of hazardous materials in their operations. Some of those operations are at both facilities, significant metal finishing and electroplating operations which are known to use PFAS as a mist suppressant in some of the plating baths. They did testing of those the metering equipment, so they had large aboveground storage tanks with very, very volatile and volatile and flammable liquid surrogates for gasoline. That’s exactly where if you’re if you’re ever gonna run into a fire suppression system that is charged with a triple F, which is a PFAS containing foam. It’s that type of facility, one that has large volumes of highly flammable liquids. It’s the best means for suppressing fires when those kind of liquids and chemicals are involved. And here was the shocker. We were only less than a week into the diligence process. We had submitted a diligence request list. saying, Please upload any and all prior environmental assessments. And the response came back and said, none. And after getting up off the floor we said, Holy crap! Pardon my language there! But Well, this is. And to the point I made in my earlier slide about don’t wait to produce a formal report when you bump into something that is significantly material. I had prior experience, and this I saw a question pop up in the chat room there. How do you? How can you estimate cost without doing a Phase II? Well within, I’d say maybe the to years ago I was involved in the cleanup of an almost identical facility, a facility that had a long history of manufacturing gasoline dispensing pumps. This one happened to be under RCRA corrective action, but the cost for cleaning up that site was well in excess of 5 million dollars. I think, when all was said and done, if you factored in council cost, it was probably closer to 10 to 15 million dollars. I didn’t mean that as a dig, Dennis. But yeah, so you you can if you have sufficient experience and certainly relevant experience on similar sites. You don’t need a Phase II to estimate what those potential worst case cleanup costs might be. Anyway, let me continue on down here. So we mentioned, we said, Well, the two solutions are going to be in getting the an indemnity, and we weren’t concerned about the financial wherewithal. Like I said, this is a large, publicly traded company. So if we could get the seller to give us an indemnity for preexisting conditions that would have gotten us pretty comfortable, but they denied that they did not want to provide any kind of indemnity. So then we turned to insurance. And we didn’t think there was a snowball’s chance, and you know where we would get coverage for PFAS. We were just hoping that we could get coverage for all the chlorinated solvents and the heavy metals that were associated with their metal finishing operations, and that might get the client pretty comfortable. But then one team member said, well, it never hurts to ask. So. sure enough, we got two quotes from two carriers, and they were both willing to provide coverage for all of the contaminants that we suspected might be present on the property as well as PFAS. There were more stringent conditions. There were no look conditions which show up in just about all pll policies. You can’t volunteer insured party can’t voluntarily start looking for contamination. The contamination has to be discovered via a regulatory requirement. Well, the condition for coverage for PFAS even went a step further and said that PFAS can’t be included in some broader investigative scope. It has to be an investigation that’s required by regulatory agencies and specifically focused or targeted on PFAS. But Bridge House provided all the technical reports that supported the transaction, supported the request for coverage, pll coverage. And we were successful. The parameters there tell you what kind of policy was. Eventually there were two carriers that offered pretty similar quotes, 10 year terms for the coverage, 15 million dollars per occurrence, or in aggregate limit, and the premiums were in the $265,000 range.And I think I mentioned this as a possibility in my earlier discussions. I think the seller was eager to make the sale happen, they were unwilling to issue an indemnity, so they offered to pay. It ended up that they paid a significant portion of the annual premiums and the deal closed for million dollars in the second quarter of 2024.

Jared Dubrowsky: Yeah, yeah, correct. Can I jump in?

Gary L. Walters: Sure, sure, sure.

Jared Dubrowsky: When you’re looking at these policies, they are an asset to the sale right? And very often what we will see is, we will see someone who says, You know what? I’ll pay it. I’ll split the cost with you, whatever the case may be, and and there may be concessions within, that you may, they may want to be listed as an additional insured under the policy. So they get some protections. You know those are all things that Dennis can touch on, This that can be negotiated into sale. And that’s the beauty of of having everyone at the table, right? And not taking the siloed approach where somebody says, I need a policy. Okay, here’s a policy without understanding every other facet of the deal. It’s really important to know the deal as far as the coverage goes. What Gary mentioned is we call in the industry a voluntary site investigation exclusion. So very often the carriers are going to say, you know what? We know that there’s something here. We suspect that there may be something. There’s probably a better way to say it, but as long as you don’t go looking for it on your own. We’re okay. With that somebody comes in and says, we want you to sample and you find it, we’ll pick it up at that point. So typically what we see is we see what’s called the Vsi voluntary site investigation exclusion. And within that, there’s typically language that says you, the buyer or the owner of the property can’t go in and investigate on your own. But if the governmental entity comes in and says something’s there, or we’ll see that sometimes we’ll see what’s called a government trigger. So it has to be a governmental entit that’s saying, Do the remediation. And one of the reasons it’s important to work directly with the broker on. You want to make sure that governmental trigger, or that. Vsi, maybe it doesn’t have to apply to the whole site. Right? Get really narrow with the coverage. Get, you know, laser focused on certain issues, broad coverage or broad exclusions can be problematic if something else pops up down the line right there. We’re looking at a year time period, you know. If we go back years from or we go, you know, back years and you look at the environmental regulations in this country, they’ve changed. So over the course of the next years they’re going to change. Things that we didn’t think were bad are going to be deemed bad. So laser in. Work with somebody who knows the space. Work with the attorneys, the consultants, and the brokers. And you know, make sure that you are not just blanket excluding things because it will come back to bite you.

Dennis M. Toft: I agree with what Jared said. And just to add, since Gary made a little dig at lawyers, let me just point out something vis-a-vis consultants. Not everybody is going to be as good as Bridge House, or have the experience of a Bridge House. And you need to be careful about who you’re getting advice from. What type of entity it is? And what the terms are of your policy with the consultant or your contract with a consultant. And what type of insurance your consultant has. We’ve seen sites where contour advice. A client did not buy environmental insurance. And yet something unknown was discovered on the site, and we ended up with a claim against the consultant, who completely missed it and and blew it, even though they were specifically asked to look for it. So, as part of the team, make sure your consultants are like Gary, and know what they’re doing, and have had experience in doing it and make sure you understand whether the contract with consultants has limitations on their liability in it, and that they have adequate insurance, because lots of consultants don’t. Yeah, that’s a really good point. Yeah. And Dave, do you want me to answer the question on the Edd. Since we’re on the stock purchase agreement here?

Dave Colonna: No, why don’t we jump to your case study? We have about ten minutes left. I do want to make sure that we save a few minutes for questions, because there are a bunch and they’re good ones here. But, Gary, thanks for for bringing that case study to the table, because I think it’s a real fascinating one.

Dennis M. Toft: And this is also sort of a work in progress, one that I wanted to put in here. The site’s an old landfill, and it’s an old landfill that’s being cleaned up by the town that dumped the garbage there. It’s owned by somebody else. It’s not owned by the town. There was a settlement that the town had, and the owner had with their Cgl. Carriers, where the carriers agreed to fund the remediation up to certain amounts, and those funds are held in escrow, and being drawn upon by municipality as they do work. Our client wants to purchase the site. Take over the closure because they don’t think the municipality and their consultant are doing a great job that will benefit them from a redevelopment standpoint. And they want to redevelop it. Originally it was going to be redeveloped for industrial. And now they’re looking about redeveloping it for residential. So you have a number of risk components here that drive the insurance demand. We are looking at and working with our favorite insurance broker to try to put together a policy to cover all the various interests. Our clients interest in limiting their liability, going forward and being protected from claims against future residents. The sellers interest and the sellers carriers interest in making sure that they are completely done and out of the picture. And similarly with the municipality, the municipalities interest, and the Cgl. Carrier’s interest to say that they are done. So it’s very highly manuscripted policy. It has changed over the course of the transaction which has been going on now for longer than it should have, because whenever you deal with a governmental entity, a seller, there are other implications and constraints that come into effect. Big issues. The site is s right next to a park, and there are a number of streams and wetlands there. PFAS! It is a landfill, so there’s almost a presumption that you will find PFAS there, although no one has looked for it yet. And just how the various parties are relating to each other. One of the complications here, too, is that the municipality wants to have its own environmental insurance broker involved looking at things. So sometimes you get that competing interest among different brokers which creates complications when brokers go to the markets because you have two different brokers talking about the same site and same conditions, and it’s something to be avoided if at all possible. So this is type of deal where environmental insurance is going to be the key to getting it done. Ultimately, we’re hoping it gets done by the end of the second quarter of this year. Though there are still a number of moving parts to the transaction. And I can tell you we are on the phone regularly with our insurance broker updating, making sure we understand where the markets are, because the availability of coverage changes constantly. And one of the things I tell people all the time is, if you want to close the deal with environmental insurance, for some reason it seems like in December every year the carriers are much more flexible than they are other times of the year, because they all want to book the premium before the end of the year. So it’s something to keep in mind. Just a little practice tip from. I’ve noticed. I appreciate that.

Dave Colonna: Jared, Jared, do you want to speak to to this deal for a second? Your side of it, your perspective?

Jared Dubrowsky: Yeah, I’ll try to be brief, because I know we do have some questions. But yeah, this is one where again, this is a team play. This is not something where the broker can just be told Hey, here’s what I need to do. Go do it right. This is something where, as Dennis said, you need regular updates. You need constant communication. The markets are changing, you know, when a deal goes on for this long carriers, terms and conditions change over that time. So if they quoted it six months ago, and I’ve seen this before, I have. I have deals that have been in play for over a year. And we quote it, and then terms and conditions change. I had that happen where PFAS was not excluded, and then the carrier called me up and said, You don’t buy within the next week we have to exclude PFAS. And swap out that carrier and put in a new carrier on the primary layer. So constant communication, I think that’s the most important part. Everyone has to be at the table together. This is not a Dennis show Jared show a Gary show. This is a, you know, a team type show. If you know what I mean.

Dave Colonna: Yeah, yeah, I think, guys, these were, these were really insightful and great. So thank you for everything. I hope everybody got got a lot out of it, and I do want to turn to some questions. I don’t want to be too repetitive here, but you know one of my main takeaways is, if insurance is the solution, then, as Jared and and Gary and Dennis have all said multiple times, the most important thing is to get everybody at the table. Work out the deal, make sure everybody’s represented, and if it’s the best path forward, then again, make sure everybody’s talking to each other. So thank you guys again. We have, like I said, a bunch of questions here, some that did come in earlier. We’ve kind of touched on PFAS, but I do wanna ask a you know, a pretty straightforward question. As far as this goes, I mean, are there options out there from an insurance perspective? If the site does have known PFAS contamination today? The short answer is, yes, you have to be willing to pay for it, though. I’ve had some sites with confirmed PFAS contamination. Carriers are willing to cover it. There’s a handful who will do it. It’s not your typical policy. It has to be structured around some other coverages that will need to be in place, and it’s not cheap. But you know, when you’re looking at a deal that’s million, a hundred million million dollars. a $300,000 or $400,000 policy in the scheme of things isn’t that much to facilitate the transaction? So it’s there. It’s doable. You know you may have some limitations, but again, if you’re working with an attorney and a consultant, you can kind of work that out. You can work it into the structure of the deal.Dennis. Gary. Anything to add to that?

Dennis M. Toft: Look, if you’re in New Jersey, I don’t. I don’t think it’s as easily insurable as elsewhere, but I also think you have to consider the source. If it’s New Jersey, you sample anywhere, you’re probably going to find PFAS just because we had manufacturing going on. And there’s airborne deposition. So if it’s not an onsite source, I think it’s probably easier to get coverage than not.

Gary L. Walters: I would agree with that. Jared would have if it’s you know, if it’s known to be present from an onsite source its a cost cap type of policy, aa better solution to try to limit the

Jared Dubrowsky: Yeah.

Gary L. Walters: Percent of liability.

Jared Dubrowsky: It can be. But cost cap is something that is so site and deal specific. It’s hard to say. You know, with with other pollution policies we can do the hypothetical. You know the cost cap went away for a while. And when it came back came back selectively. So not only does it have to be the right deal, but the carriers have to engineer it on their own, and most of the time they’re not really going to agree % with what the client’s consultant comes back with. They’re gonna want to go with their consultant, that number. So it it’s something that should be explored by all means.

Dave Colonna: Okay, Dennis, I want to turn to you here. You touched on this question earlier. What are the general environmental due diligence implications relating to stock purchase versus asset purchase?

Dennis M. Toft: So remember when you’re buying stock in a company, you’re buying all of that company’s liabilities. So you need to be concerned not just with what’s on site in terms of remediation risk, but you have to understand what did the company do? Where did they send waste? Are those sites now going to be cleaned up? What’s their compliance history? Do they have a history of violations which run with the company for permits and other things? Do you need to transfer those permits? So it broadens the scope of due diligence. Because you’re buying an existing, living, breathing company. Not just that company’s assets which you may then do something completely different with.

Gary L. Walters: If I could just add to that, Dennis, when for equity deals especially involving manufacturing companies that have a long history Bridge House almost always includes a corporate history review to figure out all of the former sites that the company may have owned or occupied throughout its history, because they they can be a source of liability, too. Yeah, I got a great story about that, but I don’t think we have time. But just let’s let me just say that a company refused to acknowledge that they used to own a site. Our client was cleaning up until we found it booked in their corporate library with pictures of the site as being part of their ownership.

Dave Colonna: All right. I think we have time for just one more. Gary, we’ll point this one to you. If you’re looking to purchase a property where the seller is not the responsible party of the potential contamination how would you recommend moving forward with the Phase II versus pll policy?

Gary L. Walters: Okay. So if you perform a Phase II and you find contamination and you’ve done an AAI compliant Phase I, then you can set yourself up for the bona fide prospective purchaser defense to CERCLA liability. So that’s one possible route. But, I, most of my clients. Most of my work is with private equity. And as long as private equity is shielded during their hold period they’re comfortable. Not Gary L. Walters: kicking the sleeping dog, so to speak. So nsurance and pll policies in particular are definitely a preferred solution for the private equity world. But I think you have. You have a choice to make. There, you’re going to be taking ownership of that property. So yeah, yeah, it’s maybe in my mind a little bit of a coin toss.

Dennis M. Toft: Okay. I think you need to be careful looking at particular State laws that apply and tie liability ownership in New Jersey. If you buy a property you own a liability.

Dave Colonna: All right. Well, unfortunately, that’s all the time we really have for today’s discussion. Anybody can read more about environmental due diligence on ERIS’ Info Hub. This website has been, or this this webinar has been recorded. We’ll also repost it there and everybody will have access to it. So with that I did want to flash everybody’s contact information. Both Jared, Gary, Dennis, and myself. If you have any questions that we didn’t get to feel free to reach out to us. Everybody’s more than willing to take the time. And we’re all in this together. So I hope everybody enjoyed today’s call. I know I certainly did. On behalf of ERIS and our attendees, I wanna thank our panelists. I think you guys were great, and it was extremely insightful. And I’d also like to thank all our attendees for spending the last hour and sixteen minutes with us. So with that, thank you, and hope everybody enjoys the rest of their day.

Jared Dubrowsky: Alright. Thank you.

Dennis M. Toft: Thank you.